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Commercial Real Estate Risk Mitigation: Contractual Indemnity, AI Endorsements and Certificates of Insurance

Structuring and Coordinating Insurance, Indemnities, Additional Insured Status and Insurance Certificates

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THURS DAY, APRIL 3, 2014

Presenting a live 90-minute webinar with interactive Q&A

Michael S . Hale, President, Clairmont Advisors, Northville, Mich. Neal J. S uit, Partner, Carrington Coleman Sloman & Blumenthal, Dallas

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Webinar Section I Presented By: Michael S. Hale, J.D., CPCU, AAI Clairmont Advisors, LLC Northville, MI

Thursday, April 3, 2014 1:00pm-2:30pm EDT Strafford Webinars

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 Parties to real estate transactions and their

counsel often overlook key insurance issues and overly rely upon certificates of insurance.

 While attorneys cannot be all things to all

people, it is worth the time to carefully address insurance and indemnity provisions.

 Insurance errors are rampant and can expose

you and your clients to disaster.

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 Additionally, this webinar will provide you

with a checklist on frequently found gaps in business insurance programs.

 Recent updates in certificates of insurance

being used to evidence coverage present substantial issues for drafters of contracts and leases.

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 New additional insured endorsements to

Commercial General Liability (CGL)policies add to the complexities for the attorney drafter.

 Indemnification provisions do not often track

with the insurance coverage being provided.

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 Certificates of insurance should, for most

purposes, be assumed to have little effect. Such certificates not only say they are for information only and do not change the policy, they are almost always drafted by insurance agents who may be legal agents of the policyholder and not the insurer. Thus, the certificates are not likely binding on many insurers, who are quick to ask agents not to even send them copies.

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 Certificates include disclaimer language that

the holder should not rely upon the certificate.

 The certificate is only one page and does not

reference key coverage provisions or gaps.

 See example of a certificate on the next slide.

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“THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AFFIRMATIVELY OR NEGATIVELY AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES

• BELOW. THIS CERTIFICATE OF INSURANCE

DOES NOT CONSTITUTE A CONTRACT BETWEEN THE ISSUING INSURER(S), AUTHORIZED REPRESENTATIVE OR PRODUCER, AND THE CERTIFICATE HOLDER.”

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 THE INSURANCE AFFORDED BY THE

POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES.

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 IMPORTANT: If the certificate holder is an

ADDITIONAL INSURED, the policy(ies) must be endorsed. If SUBROGATION IS WAIVED, subject to the terms and conditions of the policy, certain policies may require an endorsement. A statement

• n this certificate does not confer rights to

the certificate holder in lieu of such endorsement(s).

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CANCELLATION “Should any of the above described policies be cancelled before the expiration date thereof, notice will be delivered in accordance with the policy provisions.”

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 THIS CERTIFICATE IS ISSUED AS A MATTER

OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.

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Special Conditions RE: Leased/Rented Equipment “The Certificate Holder is a Loss Payee.”

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 The Acord 25 Certificate of Insurance replaces

an older version. This new certificate includes no representation at all that the insurer (or agent) will provide any notice to a listed additional insured.

 This presents major concerns when

representing landlords or construction project owners.

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 Notably, mortgagees are usually protected

by the property insurance policy protecting the real property collateral. This may not, however, be the case as respects business inventory lien holders.

 In light of the above, be very cautious about

your client agreeing to language that requires notification of cancellation or material change to the other party.

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 There are at least over 31 different types of

additional insured endorsements available on a standard CGL policy. This includes additional insured club members, charitable institutions, volunteers, executors, administrators, lessors and many other types. Which endorsement is right for your client?

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 Additional insureds do not have the same

rights as named insureds. Additional named insured is usually not doable unless same

• wnership as other named insureds. Even

though a landlord, for example, may be listed as an additional insured on the other party’s liability insurance policy, such coverage is

• nly derivative of the negligence of the

named insured tenant.

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 1993 Endorsement Stated: WHO IS AN

INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing

• perations performed for that insured.

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 The 2004 revisions created the greatest

change, deleting the favorable (from the insured's perspective) "arising out of" language from the policy and inserted in its place the phrase "caused in whole or in part" by the acts or omissions of the named insured

• r those acting on the named insured's behalf

at designated locations.

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 The 2013 endorsements begin with a broad

"HOWEVER," narrowing coverage such that insurance afforded to an additional insured (1) only applies as permitted by law, and (2) if such coverage is required by contract, the coverage afforded "will not be broader than that which you are required by the contract or agreement to provide for such additional insured."

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 “Primary and noncontributory” additional

insured language in a contract’s insurance provisions can be important to the additional insured but warrants caution. Many CGL policies do not automatically contain such language which purports to elevate the additional insured to primary status on the named insured’s policy.

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 “Blanket” additional insured endorsements may

extend coverage but should not always be relied

• upon. There is an endorsement available on the

CGL policies of many insurers that will provide “automatic” additional insured status where this is required by a written contract including a lease.

 Such endorsements can sometimes limit

coverage in certain ways such as excluding coverage for renovations or improvements made to real estate.

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 Requirements to name additional insureds

should not apply to all of the defined policies. This is a common mistake. Workers’ compensation, for example, is not a policy on which an additional insured can be listed.

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 An additional named insured is completely

different than an additional insured.

 A loss payee has not independent rights to

coverage.

 Major issues arise in triple net leases where

an owner is allowing a tenant to insure the property.

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 If your client is agreeing to name a company

and its “employees, officers, agents and members” in the contract, know that this is not automatic. The insurer will typically only list the company without the other persons.

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 Be cautious about professional liability

insurance policies and additional insureds. Be particularly careful about requiring additional insured status of your client on such a policy because it usually means that coverage for suits by your client against the hired company would be barred under the insured versus insured exclusion which is almost always contained in such policies.

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 Be cautious about certificates of insurance.  Additional insured status may not be providing

the coverage that you think it is.

 Many attorneys, understandably, are not

insurance experts and do not clearly comprehend the nature of what should be included in insurance requirements provisions or how to best protect their clients through adequate insurance policies. It is advisable to consult competent insurance agents and insurance counsel in these evaluations.

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 Get an agent who is not going to hide behind an

“order-taker” shield.

 Get an agent who will be an advisor and risk

management consultant.

 Consider hiring an insurance consultant to be an

• bjective adviser.

 Work with other experts like valuation experts,

CPA’s, attorneys, etc. as part of an overall team. Don’t expect that the agent is an expert at things like valuation.

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 Always try to negotiate blanket limits on

property insurance.

 Get a signed statement of values to the agent

and also a business income worksheet.

 Do not tolerate coinsurance where it can be

avoided – for building, contents or business income.

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 Understand business interruption coverage:

a) Monthly limit b) Coinsurance c) Maximum period of indemnity d) Extra expense coverage d) Loss of rents form e) Extended period of indemnity

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 Inadequate liability limits are a major

problem, especially re: motor vehicles.

 Inadequate coverage for premises damage

liability is an issue that needs to be dealt with.

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 Employment practices liability coverage is

critical and the available forms differ considerably among carriers.

 Fiduciary liability insurance is inexpensive and

important.

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 Names are critical and are often overlooked.  Autos present major issues where owner

insures on company fleet.

 Be very cautious about lease agreements and

coverage for property damage to the leased space.

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Neal J. Suit

Carrington, Coleman, Sloman & Blumenthal, L.L.P. Dallas, Texas

Insurance Provisions in Real Estate Transactions Strafford Webinar

April 3, 2014

Two Risk-Shifting Mechanisms

Indemnity Provisions

 Additional Insured Requirements

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Overview of Indemnity Clauses

Broad form – Indemnitor assumes

• bligation to indemnify regardless of

fault. Intermediate form – Indemnitor assumes obligation to indemnify as long as any fault rests with indemnitor. Limited form – Indemnitor obligated to indemnify only to the extent of its own fault in contributing to loss.

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Fair Notice Requirements

Express Negligence Doctrine – Must expressly state intent to require indemnity for indemnitee’s own fault. Conspicuousness Test – Indemnity clause must be conspicuous within the contract, i.e., bold, large font, all caps, underline, etc.

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Second Common Risk-Shifting Tool  Seeks to transfer one party’s risk to insurance purchased by another party.

E.g., Owner requires Contractor to name Owner as AI on Contractor’s CGL policy.

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Key Question

How does one treat an additional insured provision when an indemnification provision also exists?

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Analyzing Contractual Indemnity Clauses

First step is to determine the law in the applicable jurisdiction. Some jurisdictions view the insurance policy as primary and require it to be exhausted before seeking indemnity (e.g., Roy Anderson Corp. v. Transcontinental Ins. Co., 358 F. Supp. 2d 553 (S.D.

• Miss. 2005)

Other jurisdictions specify the language of the contract will control in the analysis of insurance v. indemnity, e.g., N. Star Reins. Corp. v. Continental

• Ins. Co., 624 N.E.2d 647, 652 (N.Y. 1993).

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Scope of AI Coverage

 Evanston Ins. v. ATOFINA Petrochems. (Tex. 2008)  No contractual indemnity for ATOFINA’s negligence.  AI = “A person or organization for whom you have agreed to provide insurance as is afforded by this policy, but that person or organization is an insured only with respect to operations performed by you or on your behalf . . . .”  Extends coverage to claims for bodily injury/death of contractor’s employee attributed to the Owner/AI’s sole negligence  “[W]here an additional insured provision is separate from and additional to an indemnity provision, the scope of the insurance requirement is not limited by the indemnity clause.”  The court did not consider the terms of the contract, but instead allowed AI coverage for ATOFINA’s sole negligence based on the terms

• f the policy alone.

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BP Deepwater Insurance Case

 Ranger Ins. v. Transocean (5th Cir. Mar. 1,

2013)

 5th Circuit: need not decide meaning of AI clause in contract; under ATOFINA, only the policy can limit the scope of coverage, if the indemnity and insurance provisions in contract are “separate and independent.”  To be separate and independent, “Texas law only requires the additional insured provision be a discrete requirement.”

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Fifth Circuit Withdraws Its BP Opinion

On August 29, 2013, the 5th Circuit withdrew its March 1, 2013 opinion and certified two questions to the Texas Supreme Court: 1) Whether Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 666 (Tex. 2008), compelled the finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BP’s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the Drilling Contract are “separate and independent”?; and

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Fifth Circuit Withdraws Its BP Opinion

2) Whether the doctrine of contra proferentem applies to the interpretation of the insurance coverage provision of the Drilling Contract under the ATOFINA case, 256 S.W.3d 668, given the facts of this case?

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Anti-Indemnity Statutes

California, Colorado, Georgia, Montana, New Mexico, Oregon, Oklahoma, and Texas have anti-indemnity statutes that limit or bar additional insured endorsements. AI endorsement could be deemed invalid and unenforceable.

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“Other Insurance” Provisions

If a party is a named insured under one policy and an additional insured under another policy, which controls?

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“Other Insurance” Provisions

Pro-rata Clause. Apportions liability among concurrent insureds. Excess Clause. The policy is only triggered when another insurer has paid up to its policy limits. Escape Clause. Attempts to avoid all liability if there is another insurance policy.

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“Other Insurance” Provisions

But what if both policies contain an “escape clause” or an “excess clause”? Courts are left to analyze the language in an effort to determine how any conflict can be harmonized.

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Other Limitations on AI Coverage

Completed Work. The additional insured has no coverage for any injury or damage after the AI’s work is completed. Intended Use. The additional insured has no coverage for injury or damage that arises after the AI’s work has been put to its intended use by any person or organization

• ther than another contractor or

subcontractor engaged in performing

• perations as part of the same project.

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Other Limitations on AI Coverage

Expiration of Lease. The additional insured has no coverage for any injury or damage that takes place after the equipment lease has expired. Injury to Employee. The additional insured has no coverage for injuries to the employees of “any insured” or “an insured.”

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Other Limitations on AI Coverage

Would the “employee exclusion” apply to a contractor named as an AI? Yes: Hayner Hoyt Corp. v. Utica First Ins. Co., 306 A.D. 2d 806 (N.Y. App. Div. 4th Dep’t 2003) No: Truck Ins. Exch. v. BRE Props., Inc., 81 P.3d 929 (Wash. App. 2003) “The Insured” v. “An Insured”

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2004 ISO Endorsement

CG 20 38 07 04:

“Any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.”

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New ISO Endorsement

CG 20 38 04 13 adds:

• 2. “Any other person or
• rganization you are required to

add as an additional insured under the contract or agreement described . . . above.”

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Scope of AI Coverage

 New ISO Endorsement limits scope

Such person(s) or organization(s) is an additional insured only with respect to liability for . . . injury caused, in whole or in part, by:

• a. Your acts or omissions; or
• b. The acts or omissions of those acting
• n your behalf.

CG 20 38 04 13

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Scope of AI Coverage

 New ISO Endorsement limits scope

. . . the insurance afforded to such additional insured described above:

• a. Only applies to the extent permitted by law;

and

• b. Will not be broader than that which you

are required by the contract or agreement to provide for such additional insured.

CG 20 38 04 13

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What Should We Do?

 Know the applicable law, including anti-indemnity statutes.  Bifurcated indemnity clauses.  Fair Notice Requirements.  Broad indemnity and insurance -- valid “to the extent” permissible.  Review or specify AI endorsements.

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Thank You

Questions?

Neal Suit (214) 855-3046 nsuit@ccsb.com

 Questions from webinar participants.  Your tuition is good for a lifetime. Call or

write: Michael S. Hale – 248-321-8941, mhale@clairmont-advisors.com.

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